A market leader in a booming niche would seem to be a winning investment idea, but Roku (ROKU 1.07%) shareholders might not see it that way. The stock may be up 40% so far in 2023 -- easily beating the market -- but it's also down a portfolio-crushing 88% since peaking two summers ago.

Starting lines matter, but whether you're a satisfied recent investor or a frustrated long-term shareholder, there are reasons to be upbeat about where Roku is headed from here. A bull market is coming. Let's check out a few reasons why now might be a good time to warm up to the streaming video pioneer. 

1. Follow the audiences home 

Roku's latest quarter was a mixed bag. Total net revenue rose just 1% to $741 million, but that was better than the 5% decline that management was targeting back in February. Its loss was slightly worse than what analysts were expecting, but after seven quarters of sequential deterioration, Q1 was the first time in nearly two years that Roku posted quarter-over-quarter improvement on the bottom line.

The good news for the company and its shareholders is that people are spending more time than ever streaming video from home, and Roku is padding its market share lead in that space. There were a record 71.6 million active accounts on Roku at the end of March, 2% higher than the count three months earlier and a 17% increase over the past year. More than 25 billion hours were spent streaming through Roku in the first three months of this year, a 20% year-over-year improvement. The fact that streaming hours grew faster than the user count indicates that the average person is spending more time on the platform.

Engagement is rising. The audience is growing. Roku is also grabbing market share. Market researcher Circana points out that last quarter, the Roku operating system powered a record-high 43% of the smart TVs sold in this country, up from the 38% slice of the market that Roku was touting in investor presentations a year ago. It's hard to go wrong with a market leader when its reach is growing in an expanding industry. 

Someone channel surfing while reaching for some popcorn.

Image source: Getty Images.

2. Ad revenue will rebound

The reason that Roku's revenue growth has crumbled despite its growing audience and engagement levels boils down to advertising. After years of growth, its average revenue per user -- ARPU, for short -- has started to contract. Because it offers its platform for free, Roku's business depends heavily on its ability to monetize its operating system through ads, ad-sharing deals, and service sign-up royalties.

The advertising market in general has taken a hit since the second half of last year, when the economy started to wobble due to high inflation and rising interest rates. With consumers spending less on non-essentials, it's easy to see why marketers are paring back how much they're willing to spend on leads. This is a familiar pattern of behavior in the advertising world when economic conditions get tenuous. It's also always temporary. 

Advertising revenue will bounce back, and when it does, it will favor streaming services a lot more than legacy networks. Roku is making sure that it will be a major player here, giving advertisers better access to the exact audiences they want to reach. 

3. Red ink isn't forever

Roku turned profitable in late 2020 and remained so throughout 2021, but that didn't last. Roku's push into exclusive content, its introduction of new consumer electronics products, and the supply chain constraints it faced all weighed on its bottom line last year. However, analysts expect its losses to peak in 2023, and they see its financial results improving in the coming years.

Wall Street doesn't expect Roku to turn an annual profit again until 2027, and that obviously wasn't a good look for it when growth stocks started to sell off in 2021 and 2022.

You may not have to wait four years to see Roku return to profitability, though. Analysts' forecasts are based on current information. The connected TV advertising market could -- and quite frankly, should -- recover faster than the general marketing industry. Some of Roku's recently rolled-out products could take off, strengthening engagement and the streamer's ecosystem. Meanwhile, management recently made cost-cutting moves and is prioritizing projects with higher potential returns on investment.

Roku established itself as a leader among streaming-video companies when it helped pioneer the space. It only makes sense that it will lead again on the way back up and out of the current dip.